Scribd
Upload
65 views5 pages

Final Question Booklet: Instructions

The document contains the instructions and questions for a final exam in an Introduction to Finance course, which consists of a single long question assessing students' understanding of concepts such as weighted average cost of capital, levered and unlevered valuation, and net present value calculations for investment projects financed through different means. Students are asked to value a perpetual company considering different capital structures and investment opportunities, calculating metrics like share price, return on equity, and weighted average cost of capital.

Uploaded by

Billy bob
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
65 views5 pages

Final Question Booklet: Instructions

The document contains the instructions and questions for a final exam in an Introduction to Finance course, which consists of a single long question assessing students' understanding of concepts such as weighted average cost of capital, levered and unlevered valuation, and net present value calculations for investment projects financed through different means. Students are asked to value a perpetual company considering different capital structures and investment opportunities, calculating metrics like share price, return on equity, and weighted average cost of capital.

Uploaded by

Billy bob
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 5

University of California

Walter A. Haas School of Business


UGBA 103
Introduction to Finance
Prof. Dmitry Livdan 17 December 2015

FINAL
Question Booklet
INSTRUCTIONS

1. Please don’t open the exam until you are told to do so.

2. This exam is being administered under the University’s rules for academic con-
duct.

3. You have 3 hours

4. The exam consists of 1 long question

5. Use the white spaces (and backs of pages) in this question booklet as scratch paper for the
multiple choice questions. Your final answers should be indicated with a pen!

6. Write your answers on the empty pages or on the back.

7. Important: PRINT YOUR NAME on the first page of your answer sheet booklet. Also
indicate your LECTURE section.

8. This is an open-book exam!

9. Laptops, PCs, PDAs, IPhones, IPads, and any other WiFi-enabled communication enabling
devices are prohibited
UGBA 103 FINAL 2

(35 points total) Deiter Yolen (D&Y) is an all-equity perpetual company with 10 million shares
outstanding trading at the current P/E ratio of 5. Its assets have just produced EBIT per share
of $20 and it pays all of its earnings as dividends. Its effective tax rate is equal to 40%. D&Y has
only assets-in-place and, thus, does not grow.
(1) (2 points) What is D&Y’s cost of capital (i.e. rA ) and what is its price per share P0 ?

(2) D&Y is considering issuing $100 million in perpetual debt at a cost of rD = 5% to buy back
some equity. If D&Y decides to do the buy-back:
(i) (1 point) What is the value of the levered firm?

(ii) (1 point) What is the value of equity after the recapitalization?

(iii) (2 points) What is the price at which equity is repurchased?

(iv) (2 points) How many shares have to be repurchased?

(v) (2 points) What is the equity return of the recapitalized (levered) company?

(vi) (2 point) What is D&Y’s WACC?


UGBA 103 FINAL 3

(3) D&Y has decided not to go with the recapitalization (i.e. it is still all-equity firm). Instead,
D&Y has a new investment opportunity: reinvest $12 per share during first 2 years and then $10
per share during last 3 years out of its earnings into developing a new drug. After 5 years the drug
will be developed. The return (before taxes) on the project is 60% (r∗ = 60%) for the first 2 years,
i.e., in years when you invest $12, and 40% (also before taxes) for the last 3 years, i.e., in years
when you invest $10, and each $1 of investment pays forever starting one year after the investment
has been made. The first investment will be made 1 year from now and the last one will be made
in year 5.
(a) (8 points) What is the D&Y’s price per share with the project?

(b) (2 points) What is D&Y’s PVGO per share with this project?
UGBA 103 FINAL 4

(c) After some deliberation, D&Y decides to finance its new project with debt rather than
earnings. Specifically, it will borrow today the PV(All Investment) at 3%, use it to finance all five
investments, and will repay it as a perpetual bond.
(i) (7 points) Calculate the new price per share with project and debt financing. (HINT: Now
company is levered!)

(ii) (3 points) What is D&Y’s WACC with this financing?

ONE MORE QUESTION ON NEXT PAGE!


UGBA 103 FINAL 5

(iii) (2 points) Show that you can get the answer in part (a) by discounting D&Y’s dividends
with WACC.

You might also like